Revolving Door Turns, Uncertainty Starts Falling

Editors’ Note: MarketMinder Europe is politically agnostic. We prefer no party nor any politician and assess developments for their potential market implications only.

Six-plus weeks after his Labour Party suffered broad local election losses—and less than two years after winning a so-called loveless landslide general election—UK Prime Minister Keir Starmer resigned Monday. The move caps weeks of rumours and speculation and follows now-former Manchester Mayor Andy Burnham’s by-election victory in Makerfield last Thursday, which returned him to Parliament and enabled him to challenge Starmer. Now he is the presumed successor, with no other candidates having put themselves forward as we write. It looks to us like the political uncertainty we observed hanging over UK stock markets is starting to dissipate, which we think is likely to aid their continued climb up the proverbial wall of worry.

As we write, Burnham is the only Labour leadership challenger in the ring. Would-be rival Wes Streeting, who kicked off the leadership storm by resigning as health secretary last month, declined to run and cast his lot with Burnham instead. Other rumoured challengers, including former Deputy Prime Minister Angela Rayner and Energy Secretary Ed Miliband, are reportedly jockeying for position in a Burnham cabinet rather than rallying leadership support. After reports late Monday that Starmer’s allies were pushing cabinet member Darren Jones to stand as a continuity candidate, Jones’s camp downplayed that talk Tuesday.^[i] Should Burnham remain unopposed, it theoretically enables him to take office next month. In that time markets should also get clarity on his cabinet, including his choice of Chancellor of the Exchequer.

That position got loads of attention from commentators we follow, with many speculating how a Burnham premiership will handle economic policy. Political watchers we follow generally place Burnham left of Starmer, raising the usual bogeymen of aggressive tax hikes, nationalisations and higher public debt. Analysts we follow envisage current Chancellor Rachel Reeves getting replaced by someone more spendthrift, supposedly risking the UK’s bond market credibility. Best we can tell, none of it stems from actual policy proposals, which we noted seemed largely absent from the Makerfield campaign. Rather, commentators we follow seem to be projecting Burnham’s past off-hand comments about the UK taxing work too much and wealth too little.^[ii] So we see a lot of talk about wealth taxes, mansion taxes and the like.

We think it all goes too far, likely creating some positive surprise potential for stocks. Burnham may not have oodles of political capital. His chief appeal seems to be personal charisma and his absence from Parliament since 2017, helping him stay above the proverbial fray. His popularity in Manchester also helps. But it is worth remembering that Burnham twice lost Labour leadership races, trailing distantly against Miliband in 2010 and Jeremy Corbyn in 2015.^[iii] He seemed to reverse position on several issues during the Makerfield campaign, and whilst he has hinted at fiscal largesse, he has also pledged to uphold the UK’s statutory fiscal rules.^[iv] Meanwhile, the Labour Party’s divisions run deep, and its next leader looks likely to face the same internal opposition that hamstrung Starmer. To us, the biggest winner looks like the status quo.

With so many commentators we follow warning of radical policy shifts potentially harming UK stocks and bonds, we think the status quo would be a positive surprise. Markets are already seemingly saying as much, taking Starmer’s resignation and Burnham’s presumptive ascension in stride. UK stocks rose Monday, and whilst bond yields inched up a bit, so did yields across Europe.^[v] UK yields have also fallen sharply over the last month, as Starmer’s downfall became a foregone conclusion.^[vi] It looks to us like markets are pricing the change and moving on.

So we suggest staying calm about UK markets’ prospects, and we think it is worth bearing in mind what we have long observed: Markets care about policies, not personalities, and our research finds they move most on the gap between expectations and reality. Today’s chatter about potential tax hikes and bond market freakouts seemingly set the bar low, likely sapping negative surprise potential. UK stocks rising as economic policy proved less bad than feared was a hallmark of the Starmer/Reeves era.^[vii] We think more of the same would likely be fine for markets.